Should we form an LLC while starting our BRRRR careers?

Question

Hi all,

I am getting conflicting opinions on whether to set up an LLC when starting to invest in RE.  I greatly appreciate the feedback.

Sarah Hatton · Answer

Hey Heather,

If you plan to use private financing for your investment ventures, most lenders make it a requirement to close in an LLC. Reason being investment lending, aka non-consumer loans, is further solidified via an LLC. Another reason is an LLC allows for a cleaner closing and title process. Here are a few reasons why creating an LLC is beneficial to the borrower:

1) Personal Credit: When closing in and LLC your investment properties will NOT be reported to personal credit bureaus . This is especially important in the worst case scenario of foreclosure.

2) More protection: most hard money loans will require a personal guarantee whether or not you close in an LLC, however this does create additional hoops the lender has to go through to pursue the borrower. It's very rare this actually happens, the lender will most likely only be interested in pursuing the asset.

3) Tax Benefits: owning real estate in entities drastically increases the amount of write offs (depreciation and such) that you can take on your income taxes. Owning property individually does that as well, but owning in an LLC multiples the ways in which you can use those write offs to your advantage.

Ben Bagnall · Answer

Yes, you should.  There are plenty of talking points on this topic but no need to overcomplicate it: you don't want any one unfortunate event, accident or oversight to put all your personal assets at risk.  Insurance is great, but liability coverage will have a limit and there could be certain situations excluded from your coverage.  The primary benefit of an LLC is that it limits your liability to the value of the assets owned by the LLC (i.e. the property you buy, plus any additional properties you add to the same LLC later).  No seizure of personal assets, no wage garnishments and no personal bankruptcy from a lawsuit arising at one of your properties as long as the LLC is properly formed and maintained.  Between the LLC and the coverage from your rental property insurance policy, you'll have peace of mind that you're well protected.

If you want more resources on this topic, I would recommend Brandon Turner's The Book on Rental Property Investing. Chapter 16 addresses this question specifically.  If you want a deep dive, I would recommend Garrett Sutton's Loopholes of Real Estate.

Don't feel as though you need to be an expert on the topic in order to form your LLC.  There are service providers who make setting up and maintaining an LLC a streamlined and well-guided process.  I've used Corporate Direct to set up my LLCs and Prime Corporate Services is a similar company I'm familiar with as well.

Benjamin Aaker · Answer

First, LLCs don't give you complete immunity from liability. I like to look at them as giving you a layer of insulation. Generally, if you take a loss from a civil suit, that loss doesn't bleed into your other LLCs or your personal property, but not always.  They cost money to form and keep up, and prevent you from getting an FHA loan. They add an aura of legitimacy in the business world. They are a necessity in my opinion if you will take on a partner. If you are starting out in BRRRR investing and plan to live in the property while rehabbing it, you might consider putting it in your name and later transferring into an LLC (subject to many conditions, ask your banker). Otherwise, I vote for LLC and I create a new one for almost every new property I purchase.

Eliott Elias · Answer

You don’t need it, but it’s good to have one. Once you own 10+ properties and you want to take a line of credit on your business accounts banks are going to want to see how you perform as an entity

Matt M. · Answer

I have a small handfull of rentals and no LLC. High limits on my insurance and an umbrella policy. I have clients with 20+ units and no LLC. I have clients with 1 property and have an LLC. I have yet to find evidence of absolutely needing one.

Dan Schwartz · Answer

Can you please share some of the tax benefits you’ve reaped from holding real estate in an LLC?  Thanks.

Taylor Dasch · Answer

I dont even care about the liability portion of the LLC. My only reason for setting mine up was to get HMLs. I am sure other benefits will present themselves when I am actually needing it again, that is how Real Estate seems to work for me. Once you get a deal, you will begin learning ways to make it work!

Bruce Woodruff · Answer

Naw....I've had several.....on the advice of an attorney....(they will always say you need one), but until you get really big-time, there is no need. Just make sure your insurance is adequate.

Randy Gutierrez · Answer

If you are in it for the long haul then yes LLC all the way. Anyone who tells you otherwise clearly has not seen the benefits of an LLC firsthand or is severely misinformed. The tax benefits alone make it worth it.

Should we form an LLC while starting our BRRRR careers?

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